Ready to purchase a new home? This checklist explains some of the most important steps you should take when applying for a home mortgage loan. Review this home buyer’s mortgage checklist to increase your chances of getting a mortgage approval.
Check your credit and strengthen it if necessary
When you apply for a mortgage loan, the lender will review your credit reports and scores. This shows them how you have borrowed and repaid money in the past. A bad credit score can kill your chances of getting approved for a loan, so you need to have a good understanding of your credit history, and strengthen it if necessary. You should take a look at your FICO score, as this is what most lenders see.
Save up for down payments and closing costs
When you buy a home, there are going to be certain costs involved. You’ll have to make a down payment, cover your closing costs, and have some cash reserves in the bank to satisfy the lender. The down payment might be anywhere from 3.5% to 20% of the purchase price. Closing costs might be $2,000 to $3,000, depending on where you live.
It’s a good idea to have at least 10 percent saved for a down payment—20 percent if you want to avoid private mortgage insurance (PMI).
Research mortgage options
There are several types of mortgages available. Conventional loans are the most common, and they require a 3% to 20% down payment. If you can’t pay the 20%, most loan issuers will require you to pay private mortgage insurance.
FHA loans are another option that has low down payment requirements and easier credit standards than conventional loans. VA loans and USDA loans (for borrowers in certain rural areas) don’t require a down payment at all. Do some research to find a mortgage loan that is right for you and your financial situation.
Gather your documentation
When you apply for a mortgage, the lender will ask you for documentation. By gathering it all ahead of time, you can help expedite the process, and obtain your approval faster.
To help you get started, you should plan to need the following documents when applying:
- Income verification/employment — Last two years’ tax returns, W-2s, 1099s, and your last few pay stubs
- Credit/ID — Drivers’ license, Social Security card, or acceptable alternatives
- Financial condition — Bank and brokerage account statements including retirement accounts, proof of funds to close, a gift letter (if your down payment is coming from a gift)
Get a pre-approval
A pre-approval is an important part of the home buying process. It lets sellers know you have the borrowing power to back up an offer you make to buy their home.
Keep in mind, a pre-approval is different than a pre-qualification. A pre-qualification is the first step and will give you an idea of what kind of loan you may qualify for. A mortgage pre-approval is a more involved process that will give you a better indication of your ability to qualify for a mortgage. Think of it as the second step above being pre-qualified. In order to obtain a pre-approval, lenders will take a look at your income, assets, credit history, and debts.